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153 CHAPTER 6 PROMOTING CLIMATE-SMART TRADE Introduction As already indicated, trade policies in relation to climate change consist of policies that ban or restrict imports or exports of climate-unfriendly goods and services, and promote imports and exports of CSGTs and climate-smart services. Such policies are subject to international trade rules under the multilateral trading system (MTS).79 Annex B of part II categorizes the most important WTO rules that could have an impact on various climatesmart policies, not just climate-smart trade policies. With regard to restrictive import practices, countries can resort to tariffs and NTMs. Tariffs are generally already very low although, in some cases, countries have the flexibility to raise tariffs up to a certain ceiling that they have committed to under their WTO schedules. A popular trade policy tool is the border tax adjustment, but this tool also has its limitations. This concept is further discussed below. Trade in carbon-intensive goods and services should be discouraged through environmental laws and regulations implemented on a non-discriminatory basis, rather than through trade-distorting measures that should be avoided In addition, countries have to take their commitments under various bilateral and regional trade agreements into account, which often results in zero or very low tariffs as well. For that reason, countries increasingly deploy a wide array of NTMs in order to prevent or discourage imports of particular goods and services ostensibly on the basis of social and environmental concerns, but more often than not as a tool of “murky protectionism” (Baldwin and Evenett, 2009). As any restriction or ban of either imports or exports may distort trade and violate WTO rules as well as commitments under regional and bilateral trade agreements, these policies are not recommended in this report. Rather than resorting to such restrictive measures, the use of proper environmental regulations may be applied on a nondiscriminatory basis to discourage the production and use of climate-unfriendly goods. Suggestions have been made for reviewing the WTO rules with regard to climate change. For example, Hufbauer, Charnovitz and Kim (2009) recommended changes in existing WTO rules that would simultaneously create policy space for countries to limit GHG emissions without sacrificing the competitive advantage of their own industries, while also preserving an open trading system relatively free of discrimination and opportunistic protectionist measures. They also recommended that WTO members should negotiate a Code of Good WTO Practice on Greenhouse Gas Emissions Controls that would delineate a large “green space” for measures designed to limit GHG emissions, both nationally and 79 Multilateral Environmental Agreements related to climate change (basically, the Kyoto Protocol) do not have specific trade rules. Therefore, the only international trade rules are found in e WTO agreements and regional/bilateral trade agreements. 154 globally. Such a “green space” would allow climate measures that are imposed in a manner broadly consistent with core WTO principles, even if a technical violation of WTO law could occur. As a result, such measures would not be subject to challenge in WTO dispute settlement by governments subscribing to the Code. Measures covered in the Code include border carbon taxes, non-discriminatory performance requirements on imports, cap-andtrade systems, comparability assessments of foreign climate regulations, non-compliance measures for climate commitments, preferences for least developed countries as well as climate and climate-unfriendly subsidies. Figure II.1. An example of a mix of climate-smart trade, investment and enterprise development policy 155 However, the promotion of trade in CSGTs and climate-smart services is certainly possible, legal and therefore the recommended option for achieving the 3W outcome (World Bank, 2008). Section C explores the various modalities for liberalizing trade in CSGTs. As with all other policies, trade policies need to be consistent and coherent with other climatesmart policies. Figure II.1 shows an example of an integrated climate-smart trade, investment and enterprise development policy. A. Border carbon adjustments Among all measures for restricting imports of climate-unfriendly or carbon-intensive products, the border carbon adjustment (BCA) has emerged as a potentially powerful instrument. In countries that impose a national carbon tax, there are concerns that such a tax would affect competitiveness of domestic companies and may result in carbon leakage. As a result, some countries (mostly developed countries) are considering levying a border tax adjustment or BCA on imported goods that are not subject to such taxes in their home countries. In the United States, for example, the American Clean Energy and Security Act of 2009 (based on the “Waxman-Markey Bill”) includes BCAs for addressing competitiveness concerns. Other developed countries have not yet resorted to this unilateral instrument, but they may follow suit. BCAs in particular are considered to be important national instruments, as discussions on international (sectoral) agreements on global carbon costs are still ongoing. Despite the potential usefulness of BCAs as instruments for pushing companies towards clean production, there are concerns regarding their effectiveness as well as legal and economic concerns (Pauwelyn, 2007). In particular, there is concern that such taxes would unfavourably affect those developing countries that are not in a position to easily switch to clean energy and use of clean technologies. In fact, developing countries see such measures as protectionist and a violation of the principle of “common but differentiated responsibilities”. As a result, BCAs may be challenged under the WTO Dispute Settlement Mechanism. The application of BCAs should not be a preferred climate-smart trade policy tool as they may constitute disguised restrictions on international trade and disproportionally affect exports from developing countries Pauwelyn (2007), in evaluating the use of BCAs in the United States, argued that “border tax adjustments” were explicitly permitted under WTO rules for product-related or indirect taxes (such as VAT or sales taxes). The carbon tax is, then, simply the extension to imported products of the tax or cost of holding emission allowances imposed on domestic producers. However, to limit the impact on trade, only a limited list of imports of energyintensive raw materials should be covered. The carbon tax on imports must be “equivalent” to the internal cost imposed by domestic climate legislation on domestic products. Importers are required to submit information on the amount of carbon emitted in the production of the product abroad; such information is to be certified by the foreign manufacturer. 156 Various studies have revealed that the increases in production costs as a result of BCAs are only marginal, and are often compensated and therefore do not significantly affect competitiveness and trade (e.g. World Bank, 2008; and Whalley and Lockwood, 2008).80 However, if larger GHG emission cuts are needed than currently committed (and it is clear that they are), then higher BCAs may be the result in the future. The problem is that BCAs are very difficult to calculate to enable adjustments for direct and indirect cost differentials associated with climate change policies. BCAs would have to be levied on “like” products to satisfy the national treatment principle, which includes the way they are produced. Determining “likeness” is a complicated matter. While GATT law allows border adjustments for indirect taxes, it is not clear whether inputs that are not incorporated in the final product can be subject to BCAs. Most importantly, World Bank studies have indicated a potential export loss for developing countries as well, particularly if BCAs are based on the carbon content of imports rather than on carbon content of domestic production. For example, China’s manufacturing exports would decline by 20 per cent and those of all low- and middleincome countries by 8 per cent; the corresponding declines in income would be 3.7 per cent and 2.4 per cent, respectively. BCAs may lead to a reduction in world market prices for products subject to BCAs, leading to reduced export revenue (Mattoo and others, 2009). Another analysis found that tax rates of $50 per mt of virtual carbon could lead to very substantial effective tariff rates on the exports of the most carbon-intensive developing nations (Atkinson and others, 2010). Countries relying, to a high degree, on energy-intensive manufacturing are likely to be particularly vulnerable to unilateral trade measures. A way out would be to seek a waiver under WTO on the MFN principle for imports from developing, and in particular for least developed countries. Another way out is to justify BCAs on the basis of GATT XX, which lists general exceptions to GATT obligations (Pauwelyn, 2007), although it is not clear whether this justification is legally acceptable. In any case, since most demand for carbon-intensive products comes from developing countries, the effectiveness of BCAs imposed by developed countries in disciplining developing countries may be limited. Border tax adjustments based on carbon content in domestic production rather than on the carbon content of imports would address the competitiveness concerns of domestic producers in developed countries, and would less seriously damage exports from developing countries (Mattoo and others, 2009). In any case, as the compatibility of BCAs with WTO law is uncertain, Asia-Pacific countries could, in the meantime, consider establishing a regional mechanism and disciplines for BCAs on a non-binding basis (e.g. within the context of APEC, APTA or ASEAN + arrangements). Such arrangements could, in due course, be multilateralized at the global level. 80 The World Bank (2008) found that only in the case of the cement industry did the imposition of a carbon tax by the exporting OECD country have an adverse effect on trade. In the case of the paper industry, trade actually increased as a result of a carbon tax. 157 B. Liberalizing trade in climate-smart goods and technologies Chapter 3 shows that there are indeed many opportunities for trade in CSGTs in the region. The promotion of imports of CSGTs can take place on the basis of dismantling barriers, consisting of tariffs and non-tariff barriers (NTBs), to such imports. In many cases, it appears that tariffs on imports of goods in general, and CSGTs in particular, are already quite low. The incidence of NTBs, such as licence requirements or standards is of much greater concern, although some instruments that could be interpreted as NTBs may actually play a useful role in strengthening domestic competitiveness in CSGTs. In any case, the promotion of exports of CSGTs is undertaken in many countries through the provision of active support for domestic “green” enterprises, either financially (e.g. through subsidies or tax incentives, as discussed above) or in kind (e.g. technology support, government procurement etc.). However, such exports may encounter import barriers in destination countries. Again, these barriers tend to be NTBs rather than tariffs. This section explores the modalities to reduce or eliminate barriers to international trade in CSGTs. In essence, three modalities can be distinguished to liberalize trade in CSGTs and climate-smart services: (a) Multilaterally, through the Doha negotiations; (b) Bilaterally or regionally through bilateral and regional (free) trade agreements; (c) Unilaterally or autonomously where no reciprocity is demanded or expected. The liberalization of trade in CSGTs and climate-smart services, both globally and regionally, and including the reduction or removal of both tariffs and NTBs is a principal policy tool to achieve the 3W outcome Of these three modalities, the third option remains the prerogative of a national government without interference from other countries. The only obstacle may be posed by domestic stakeholders (particularly domestic businesses developing competitiveness in CSGTs and therefore may object to import liberalization of potentially competing products). From a national efficiency point of view, governments may wish to pursue unilateral import liberalization anyway in order to force domestic businesses to compete and upgrade their own performance. However, where national stakeholders are powerful, or domestic businesses are not competent enough to face international competition, governments may not be able to pursue this policy. In any case, the decision is a national matter. In most cases, unilateral trade liberalization targets inputs to domestic climate-smart industries or climate-smart consumer goods not readily made in the home market. They tend to be tariff cuts rather than reductions in NTBs. Bangladesh, for example, recently cut import duties on hybrid cars from 195 per cent to 56 per cent. China has also cut import duties on selected products and reduced excise tax for energy-saving small cars. India introduced preferential import duties on imports of RE equipment and reduced customs duties on bio-diesel to 2.5 per cent. Indonesia and Pakistan impose zero duty on products 158 and equipment used in RE development and energy-saving activities. Similarly, the Philippines imposes zero customs duty on imported materials for power plant construction. Malaysia introduced an exemption of 100 per cent import duty and 50 per cent excise duty on new hybrid vehicles of less than 2,000 cc as announced in its 2009 National Budget. The Republic of Korea cut import duties by 50 per cent on hybrid cars and recycling facilities as well as components used in RE generation, e.g. geothermal, hydrogen fuel cells, solar energy and wind power. Thailand introduced cuts of up to 90 per cent on tariffs for imported parts and materials for fuel efficient and eco-friendly vehicles. There is also an exemption from import duties for selected RE-related machinery and equipment. Despite these initiatives, countries tend to pursue trade liberalization through multilateral, regional and bilateral modalities. These modalities are no longer the prerogative of individual countries, but depend on often arduous negotiations and the need to accommodate the concerns of other countries as reciprocity is expected. While there is no evidence to suggest that these modalities are more efficient or lead to more trade than unilateral trade liberalization efforts. In fact, evidence may be found that unilateral liberalization has, on the whole, been the most successful approach in generating trade and welfare in many cases (see, for example, IMF, 2001), although the evidence is not conclusive (for another view, see Winters, 2000). The multilateral and regional/bilateral tracks have become politically more acceptable as countries are reluctant to open their borders without a clear quid pro quo. These two modalities are explored further below. 1. Doha negotiations81 Within the current global trade regime, a World Bank (2008) study found that removing tariff and non-tariff barriers for four basic clean energy technologies (wind, solar, clean coal and efficient lighting) in 18 high-emitting developing countries would result in trade gains of up to 13 per cent.82 The negotiations further on liberalization of clean energy technologies take place in the context of liberalization of trade in environmental goods, as mandated by the Doha Declaration of 2001, which launched the current Doha Round. Multilateral trade negotiations take place in the WTO Committee on Trade and Environment (CTE) special sessions. Negotiations have focused on definitions of EGs as well as modalities for their liberalization. The principal submissions by WTO members involved a list approach (listing of EGs including CSGTs advocated by developed countries) or project approach (targeting only goods involved in temporary environmental projects, including those aimed at GHG emission reduction as advocated by some developing countries, notably India) or a combination of both. The issues involved in defining an EG are complex. To date, no consensus has been reached. A deal in this area is contingent on a total deal under the Doha Round as part of the single undertaking and is not expected any time soon. A way out may well be a plurilateral agreement such as the WTO Information Technology Agreement or the Agreement on Government Procurement (World Bank, 2008). In the meantime, WTO has been used for litigation purposes (see box II.3). 81 82 See also annex 1 of chapter 3. Also reported in a brief by WTO on the Multilateral Trading System and Climate Change, www.wto.org/ english/tratop_e/envir_e/climate_change_e.pdf. 159 Box II.3. Use of the World Trade Organization as a litigation platform to challenge policy measures for promoting trade in CSGTs In efforts to stimulate the production of CSGTs, various countries have resorted to a variety of measures to support enterprises for that purpose. Sometimes these measures may violate, or are perceived to violate, WTO rules and are challenged by other countries. For example, in early September 2010 Japan filed a complaint at WTO against Canadian subsidies for solar power generation. Japan alleged that above-market rates were paid to producers of electricity from renewable sources under Ontario’s feed-in-tariff programme, created by that Canadian province’s Green Energy Act. The Act aims to help Ontario meet its goal to eliminate 6.4 gigawatts of coal-fired energy by 2014. A provision of the programme requires projects to use Ontario goods and labour for between 25 per cent and 40 per cent of supply costs, depending on the type of renewable-energy source. The requirements were set to rise in 2011. This Act was seen as treating local firms more favourably (i.e. breaching the core WTO principle of national treatment) through subsidizing the cost of solar and wind power generation and thus contravened WTO rules that ban unfair treatment of import products, except for tariffs. China has been similarly accused by the United States of providing subsidies to its producers of wind and solar equipment, which are not in synch with the multilateral trading rules, putting the Government of the United States under pressure to launch an investigation that could lead to cases similar to this being filed with WTO against China. Moreover, foreign producers of wind energy generation equipment have complained that they have no access to power projects financed by China’s central Government. More frequent use of government purchases during 2009 and 2010 as part of crisis-managing strategies, combined with the use of public procurement, in area of “greening the growth” has increased the pressure on China to join the WTO Government Procurement Agreement (which is still a voluntary agreement). In response, China (supported by a number of developing economies) has pointed to the contradictory position it (and other developing countries) in which it has been placed by having to shoulder the responsibility of energy saving and cutting emissions but then criticized for taking active energy and mitigation policies. Protectionist actions and threats, and resulting litigation processes, underscore the importance of forging a global climate change agreement that has specific provisions for trade that are both fair and which respect the principles of responsibility and capacity. In the absence of such an agreement, the multilateral trade negotiations on liberalization of trade in EGs assume special importance. The negotiations resumed in earnest in January and February 2011. Various lists were circulated that covered 400 EGs (including RE, environmental technologies and CCS), which included to a large extent the ESCAP list of 64 CSTs presented in chapter 3. However, definitional issues remain a sticking point and members have been requested to reduce the lists as well as provide more focus in them. Negotiations are also continuing on the modalities of liberalization and are focusing on tariffs that are often already small. Members have re-emphasized the importance of special and differential treatment, technical assistance, capacity-building and the transfer of technology.83 The Committee on Trade and Environment, Special Session, addresses the liberalization of environmental services, which include climate-smart services. However, to 83 See website at www.wto.org/english/news_e/news11_e/envir_10jan11_e.htm. 160 date, no proposals have been submitted. Members agree that this issue is also very important and could also be discussed in the Services Council in Special Session.84 2. Regional and bilateral trade agreements In the absence of multilateral commitments on reduction of tariffs and NTBs to trade in CSGTs, regional and bilateral trade agreements have emerged as the second-best option to address this issue. While various RTAs have chapters on environment, the articles contained in those chapters tend to focus on cooperation rather than reduction commitments on specific goods and services classified as “climate-smart”. As Kim (2009) observed in a recent UNEP report, “it still remains to be seen whether environmental cooperation provisions reflected in a number of RTAs have been successfully implemented, and, moreover, whether RTAs’ potential contribution to tackling climate change will be realized”. Kim (2009) also observed that countries address environmental concerns in RTAs by using environmental impact assessments and the setting of environmental standards and enforcement of environmental laws. RTAs can contribute to the liberalization of trade in CSGTs, depending on the coverage of CSGTs in the schedules of commitments by parties to individual RTAs However, the real value-added of RTAs is in the coverage of CSGTs and climatesmart services in the total goods and services that are covered in the positive or negative lists in the schedules of commitment. It would therefore be opportune to examine the schedules of commitments by member States of individual RTAs on the extent and depth of commitments on reductions of tariffs and NTBs on trade in CSGTs as well as related rules of origin. This, however, is not always an easy task in the absence of universally agreed definitions and lists of such goods. Often, those schedules are not in the public domain. Such an analysis may reveal that quite a substantial number of RTAs have commitments on goods and services that could be considered environmentally- and climate-friendly (although restrictive rules of origin may militate against effective market opening). This is particularly so for those RTAs that “substantially cover all the trade”. Table II.3 shows that, based on the ESCAP list, the coverage of CSGTs is 100 per cent in the case of AFTA and SAFTA; in the case of APTA, it will be close to 90 per cent when the Fourth Round is finished, although the level of commitment is perhaps not always as substantive. In most cases, the commitments are limited to tariffs rather than NTBs. In the case of ASEAN, tariffs range from zero to 5 per cent while in the case of SAFTA they are in principle zero per cent (by 2012), if implemented. In the case of APTA, after the Third Round of tariff concessions, the average margin of preference was 27 per cent while the Fourth Round is meant to result in an average margin of preference (MOP) of 40 per cent on all agreed products including CSGTs.85 In many RTAs, relatively restrictive rules of origin may undermine the effective utilization of concessions. 84 85 Ibid. Under the Third Round preferences, 30 tariff lines were included from the ESCAP CSGT list with an average MOP of 27.8 per cent. 161 Table II.3. Coverage of climate-smart goods in selected RTAs in the Asia-Pacific region No. of covered items (3rd Round) (4th Round) APTA 30 57 a Coverage ratio (out of 64 items) (%) 47 89 a AFTA (ASEAN) 64 100 SAFTA 64 100 PICTA 64 100 0 0 SPARTECA Source: ESCAP. Notes: PICTA – Pacific Island Countries Trade Agreement; SPARTECA – South Pacific Regional Trade and Economic Co-operation. a Under negotiation (China’s concession list excluded). However, climate-unfriendly products will also be covered under RTAs which “substantially cover all the trade”. Commitments made under a specific RTA on reduction of tariffs and NTBs on those products may undermine the capability of parties to the RTA to formulate trade policy with the purpose of restricting market access in such products, at least through tariffs, unless the parties can resort to provisions on general exceptions, similar to GATT Article XX. Legally speaking, the success of recourse to such provisions for environmental purposes is not guaranteed and, so far, there has been no legal precedent with regard to climate change. Another alternative is to renegotiate the RTA to make it more environmentally-friendly, which is also not easy. An additional problem is that RTAs as a principal modality for liberalization of CSGTs risk defining such goods in accordance with the self-interest of member countries of the RTAs, i.e. covering goods on which tariffs are already low or zero (“greenwash”). C. Policy recommendations In general terms, the following trade policies are recommended for mitigating GHG emissions: (a) Negotiate for “policy space” in WTO rules in order to allow climate-smart policies that may currently potentially violate existing WTO rules; (b) Speed up liberalization and facilitation of trade in CSGTs with focus on unilateral action and multilateral negotiations (Doha Round) and on RTAs as a secondbest option; (c) In particular, notwithstanding the level of progress or commitments as a result of multilateral or regional/bilateral trade negotiations and agreements, pursue comprehensive unilateral liberalization. This is particularly important in the case of imports of parts, components and technologies necessary for domestic production of CSGTs and related technologies, in order to develop and 162 strengthen national competitiveness in CSGTs, and to strengthen global and regional “green” value chains; 86 (d) When negotiating trade agreements, ensure broad coverage of CSGTs and climate-smart services as well as deep commitments (ideally zero tariffs with generous rules of origin and verifiable NTBs such as standards);86 (e) Avoid NTBs such as local content requirements, which also discourage investment and may violate the WTO Trade-Related Investment Measures (TRIMS) Agreement, and ensure that others (such as standards, taxes and subsidies) are applied in a non-discriminatory manner (national treatment). See also chapter 7 on climate-smart investment; (f) In addition to general exception clauses in RTAs, ensure inclusion of comprehensive and clear environmental clauses in RTAs that would enable parties to facilitate the control, regulation and import of climate-unfriendly goods and services; (g) Keep RTAs open to new members in order to avoid trade diversion. Liberalization of CSGTs has more impact with wider membership; (h) Promote exports of CSGTs through environmental regulations and incentives while avoiding restrictive trade practices, including BCAs, which may violate WTO rules or otherwise constitute distortions of international trade; (i) Promote paperless trade in all goods, and facilitate trade and transport of all goods and services through easy procedures and single windows; (j) Organize trade fairs at home and abroad to promote trade in CSGTs and climate-smart services. This may be difficult to do in the absence of a clear definition of a climate-smart good or service. The ESCAP list is only indicative but may serve as a guide. However, nothing prevents countries from drawing up their own lists and pursuing liberalization of all goods identified on national lists.